The Big Idea, Two Holidays Gems, and Margin of Safety with an Activist Twist

I want to begin by addressing my previous discussion of mortgage-backed securities (MBS), acknowledging that some technical terminology may have made it challenging to follow. To clarify the core opportunity: I see MBS as one of the most undervalued segments of the fixed income market. Several key factors make this opportunity particularly compelling in my analysis:

First, the Federal Reserve has ceased its purchasing program. Additionally, I've observed that banks, which were previously constrained by capital requirements, are returning to the market, especially given recent changes in the regulatory environment. Most significantly, I note that one of the traditional major risk factors - prepayment risk - has essentially disappeared because approximately 60% of all mortgages are at rates of 4.4% or lower. With current rates around 7%, I see virtually no incentive for refinancing.

In my Banking Credit Portfolio, these MBS investments are generating impressive yields ranging from 9% to over 14%. While I expect market volatility in the coming year due to economic and political factors, I believe this volatility actually presents opportunities to strategically add to MBS positions.

Turning to the community banking sector, I find it important to understand the historical context of bank consolidation in the United States. I've watched this process unfold since the early 1980s when President Reagan signed legislation allowing cross-border banking transactions, primarily focused on distressed institutions. In my view, the watershed moment came in 1994 when President Clinton signed the Riegl-Neal Act, which fully enabled interstate banking. I observed this trigger a massive consolidation wave:

When I first started following the sector in the 1980s, we had over 18,000 banks. By 1994, I saw this number decrease to approximately 15,000 banks. Today, I count roughly 4,500-5,000 banks, plus approximately 400 thrift organizations and 2,700 credit unions.

I continue to see this consolidation trend driven by several structural factors that I've identified:

1. Scale economics in banking

2. Rising regulatory costs

3. Increasing technology investments

4. Cybersecurity expenses

5. Talent acquisition challenges

6. Aging founder demographics

Let me examine two specific investment opportunities I've identified in this sector:

1. Blue Ridge Bank Shares (BRBS) - Charlottesville, Virginia: When I analyze this institution, I see:

• Asset base: $2.9 billion

• Branch network: 27 locations

• Current situation: I'm watching them restructure away from fintech lending

• Notable investors: I'm particularly interested in Kenneth Lehman's involvement as a major banking activist investor

• Valuation: I note it's trading at 1/3 of book value

• Catalyst: I'm following their new management team's focus on traditional community banking

2. Riverview Bank Corp (RVSB) - Vancouver, Washington: My analysis shows:

• Asset base: $1.5 billion

• Branch network: 18 locations

• Market: I see strong potential in their Pacific Northwest footprint

• Credit quality: I'm impressed by their exceptional 0.02% non-performing assets

• Notable investors: I'm tracking David Nirenberg (6.4%), Fourth Stone (8%), FJ Capital (10%)

• Valuation: I calculate they're trading at 87% of tangible book value

• Additional feature: I note a 2% dividend yield

In my assessment, both investments share important characteristics that make them attractive acquisition targets. I've identified:

1. Strong capital positions

2. Valuable deposit franchises

3. Engaged activist investors

4. Substantial discount to intrinsic value

5. Operating in attractive markets

Looking ahead, I see several factors suggesting increased M&A activity in the banking sector:

1. I anticipate regulatory environment changes

2. I observe pent-up demand from both buyers and sellers

3. I recognize the ongoing need for scale in the industry

4. I'm tracking aging shareholder bases seeking exits

My strategy here isn't about timing market movements or reacting to daily news. Instead, I focus on identifying well-capitalized institutions with strong fundamentals, backed by motivated shareholders, trading at attractive valuations. While I emphasize that patience may be required, I've found that the combination of these factors typically leads to profitable outcomes through eventual acquisition at premiums to book value.

This represents my thoughtful approach to value investing in the banking sector, focusing on fundamental analysis while taking advantage of temporary market inefficiencies and structural industry changes that I've identified through years of experience in this sector.